An investor buys a stock for $50.00. The initial margin requirement is 50% and the maintenance margin requirement is 25%. The price below which the investor would recieve a margin call would be:? A) 25.00 B) 33.33 C) 37.50 D) 42.00
can you please show some calculations?
50 (1-50%)/(1-25%) = 33.33
Maintenance margin is 25% i.e. $12.5. Initial margin is $25. The maintenance call should come when the initial margin falls below $12.5 and so the stock price should fall below 37.50.
Yo december 25 is an option in the answers…dont make it harder…
no margin call, the guys already put up 50% ($25) and if the maintanence margin is 25% (or a 75% lending ratio from the bank) of the asset value there would be no call untull the guy has less than 25% equity in the asset. Or Maybe its different in australia!!! well they lend usually up to 70% on my margin loan then there is a 10% buffer, irrelevant I know but hey!
agree with cfaboston. answer is b)
price = $50 initial requirement equity= 50% * $50 = $25 borrow = $50 - $25 equity at margin call = x price at margin call = (x+25) x/(x+25) = .25 price = $33.33
hey all, i get the calculations, but i still dont understand intuitively how it all works… can someone pls explain? i dont get why, at $33.33, you have to make a margin call? …confused…
Margin call at Price = P0 * (1 - initial margin)/ (1 - maintenance margin ) = 50 * (1- 0.5/(1- 0.25) = 33.33333 = B? - Dinesh S
>i dont get why, at $33.33, you have to make a margin call? With the price at $33.33, you would have $8.33 of equity left in your account. 8.33/33.33 = 25% It’s 25% of the current price, not the price you bought at. Next question: how much would he have to deposit?
That is the maintenance margin which you always have to maintain with broker.
chrismaths Wrote: ------------------------------------------------------- > Next question: how much would he have to deposit? initial margin - is just needed to set the transaction rolling, then on, you need a maintenance margin into your brokerage account - Dinesh S
(Account Balance - Borrowed Money)/Account Balance should be greater than Maintenance Margin % When stock is purchased with initial margin of 50%, Account Balance = Stock price = $50, Initial Margin = Money Borrowed = $25 (Account Balance - Borrowed Money)/Account Balance = (50-25)/50 = 0.5 = 50% If price falls down to $33.33 (Account Balance - Borrowed Money)/Account Balance = (33.33-25)/33.33 = 0.25= 25% Since 25% is the maintenance margin, the investor would receive a margin call. The formula to find the value of stock price (x) at which margin call would occur is Initial Stock Price * (1 - Initial Margin %) / (1 - Maintenance Margin %). This formula is just a restatement of (x - IM % of Po)/x = MM% of Po Po = Stock price at purchase.